The Reserve Bank of India’s forex swap window helped banks to attract $127.23 billion of FCNR(B) deposits but economists said it could come with a hefty $10.6 billion bill for the central bank.

The RBI’s concessional schemes for overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs) also attracted $9.15 billion, taking the total inflows to $136.38 billion.

Banks are shielded from the currency risk on the funds they raised overseas. The RBI’s potential cost stems from offering this shield to the banks.

The central bank had agreed to protect banks through a favourable swap facility estimated to cost 3%-3.5% annually for three to five years. 

The RBI will also have to absorb the extra rupees entering the banking system when lenders exchange their dollars with the central bank.

The two operations could cost as much as Rs 1.2 lakh crore ($12.7 billion) over five years, Bloomberg reported, quoting an analysis by Madhavi Arora, economist with Emkay Global Financial Services.

In June, the RBI offered the special window to shield the rupee from sliding after hitting record lows. The RBI offered to take on the risk of currency-hedging costs of FCNR deposits, and lenders offered loans amounting to up to 19 times the original deposit.

The final bill will depend partly on how the dollar proceeds are invested.

Repayment is unlikely to pose a major problem as India’s foreign-exchange reserves are expected to rise over the years from about $730 billion now and provide enough buffer to cover the amount raised, Bloomberg reported, quoting a person familiar with the RBI’s thinking. 

One risk is the potential impact on the RBI’s dividend to the government. The central bank transferred a Rs record 2.87 lakh crore in May, compared with Rs 2.69 lakh crore a year earlier.

Any reduction in the dividend could make it harder for the government to meet its budget targets.

“The funds raised, therefore, need to be deployed judiciously and productively to mitigate these first-order and second-order fiscal costs,” Bloomberg quoted Emkay Global’s Arora as saying.

The RBI could offset some of those costs by investing the dollars abroad. If the money is invested in 10-year US Treasuries yielding about 4.7%, the RBI could earn more in interest than it spends on hedging.

“On a net basis, per year cost could be as low as Rs 100 billion, or even marginally positive for the RBI,” Bloomberg quoted Gaura Sengupta, economist at IDFC First Bank, as saying.